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The worlds population is getting older… what does this mean for the stock market?

The world’s population is getting older and this is expected to produce bad outcomes for the stock market, says JPMorgan.

Strategists have noted that historically, an older population has led to lower returns, smaller earnings growth and weaker valuations.

Over a 10 year period, a 1% increase in the amount of people over 65 years old is correlate with a 0.92% decline in annual stock returns.

How does that work?

Older investors move into the natural progression of wanting to save for retirement, which leads to less investment capital and less innovation.

Coupling that with slower growth in the workforce results in negative impacts on earnings growth.

Valuations are also expected to take a hit due to the rising age of investors. As the elderly empty out their retirement funds, the national savings rate falls and bond yields rise as a result.

But it’s not all dark skies.

There’s a clear relationship between the aging population and returns in the healthcare sector.

JPMorgan states that a 1% increase in the population of those over 65 years old will lead to a 0.85% increase in healthcare returns over a 10-year period.

This could be the right time to start looking into those healthcare stocks on your watchlist.

Two Ways To Invest Cash: Dollar Cost Averaging Vs. Lump Sum Investing

What is Dollar Cost Averaging?

With this strategy, you methodically invest your cash in equal amounts over a period of time.

For example: investing $6,000 in $500 monthly instalments over 12 months.

This would occur on the same day of the month, no matter what the market is doing that day.

Pros:

Since investments are made over time at various prices per share, this strategy reduces the sensitivity of your portfolio’s return to a single date.

In other words, it helps balance out the market’s ups and downs.

If you were to invest the very first $500 on the first month of the year and the market fell the next day by 20%, you’d incur an unrealized loss only on the $500, not on the full $6,000 you intend to invest.

Cons:

By investing smaller amounts more frequently, you may end up missing out on positive returns in a rising market that you otherwise would have had on a larger sum of money.

What is Lump Sum Investing?

With this investing strategy, you invest the entire sum all at once into your portfolio.

Instead of splitting up the $6,000 into 12 equal installments of $500, you invest the full $6,000 in one shot.

Pros:

If the market is rising, the full amount of your capital is exposed to that upside, instead of just a fraction of it.

Cons:

Short-term market fluctuations are very unpredictable.

You may invest the full $6,000 into the market during a volatile stretch, for example right before a heavily anticipated earnings release, a bear market or a new government regulation, that could harm the value of your principal and may take you longer to recoup from the losses.

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What is Better: Dollar Cost Averaging or Lump Sum Investing?

The performance of each strategy will depend on the current market.

In periods of volatility, dollar cost averaging will outperform lump sum investing simply because you can catch the market when it’s up and down.

Let’s assume a 2-year buying window for dollar cost averaging into the S&P 500. Meaning, you have a specific amount of money you want to invest every 2 years, broken up into monthly installments.

Since 1997, dollar cost averaging underperformed lump sum investing in 80.6% of starting months and by 10% as a whole at the end of the 2-year buying window.

For clarity, where the black line rises above the solid horizontal black line (lump sum), these are periods where dollar cost averaging outperforms lump sum investing. The opposite is true when it falls below the horizontal line.

Even if we extend this chart back to 1960, lump sum investments into the S&P 500 continue to outperform dollar cost averaging by 7.8% and in 75% of all months shown.

It’s important to highlight that the only times when dollar cost averaging beat lump sum investing was during market crashes (i.e. 2000 and 2008).

We can talk about performance until we’re blue in the face, but like anything that comes with a higher return, there is usually a higher risk attached to it.

This is the case with lump sum investing.

Theoretically, it’s riskier for an investor to participate in lump sum investing than it is in dollar cost averaging.

Below you can see the standard deviation for dollar cost averaging vs. lump sum investing over the same 2-year buying window.

On average, dollar cost averaging had a standard deviation of 2% while lump sum investing had a standard deviation of 3.4% over the same time period.

Despite the data, it’s still important to consider your own investor profile.

If you have a lower tolerance for risk, dollar cost averaging might be a better strategy as you will avoid the risk of buying at a peak, which can cause you to become emotional should the value of your investment fall.

It’s also important to analyze market trends. If we’re in a bull market, lump sum investing might be a better strategy long term.

There is no one-size-fits-all all strategy when it comes to investing, only what works for you.

The data is there for you to make your decision, and it doesn’t have to be one or the other. You’re never locked into only one investing strategy. In fact, flexibility in the stock market can work to your advantage.

See you in the next one!

Alex (The Dividend Dominator)
Founder and CEO of Dividend Domination Inc.
Follow me on Twitter, Instagram and LinkedIn

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